surveys - All posts tagged surveys

The Institute for the Fiduciary Standard, an organization founded in the recent recession, has rolled out its eleven best practices for financial advisors and brokers. Investors can arm themselves, too, by perusing the list for tips about how to spot the industry’s inherent conflicts of interest. It’s a laundry list of potential abuses and their remedies, and suggests advisors should lay out total fees and underlying expenses; offer investments beyond internal products; and avoid conflicts of interest while disclosing the unavoidable potential conflicts.

Meanwhile, the White House, Congress and financial lobbying groups are also squaring off over whether to tighten investment-advice standards for the brokerage industry. Last week, President Obama railed against “back door payments” and “hidden fees” that incentivize brokers to push clients into “bad retirement investments that have high fees and low returns.” A report released by the White House Council of Economic Advisers said such “conflicted advice” lowered retirement account returns by a full percentage point, costing investors about $17 billion a year.

Can the existing rules be abused, both knowingly and unknowingly, by advisors? Of course they can and the burden is on the client to do their homework, says Knut Rostad, co-founder of the Institute for the Fiduciary Standard. Know, for instance, that indexed annuities, which are linked to the performance of, say, the S&P 500– but also provide some downside protection– might be attractive to you, but they’re also very attractive to brokers who typically collect a 6% upfront commission on your assets from the company selling the annuity.

Here’s another doozy conflict: compensation and bonuses that induce advisors to move to a new firm, provided they bring along their existing clients. In such cases, your advisor doesn’t have to disclose his financial inducement to bring you to the new firm, nor notify you that following him could saddle you with a hefty tax bill.

Don’t just compare your private banker’s calls with other private bankers’ calls, as Penta does annually in its exclusive asset allocation survey. Ask yourself: How does my portfolio stack up against university endowments?

A study put out by endowment trackers NACUBO and Commonfund tracks the performance and asset allocation of 832 U.S. colleges and universities, representing $516 billion in assets. The average educational endowments returned 15.5% in the last fiscal year ending June 30, 2014.

As usual, the Ivy League dominates the list’s upper ranks. Harvard University takes the top spot with nearly $36 billion in assets and a 15.4% return in the fiscal year ending in June, in line with the study’s overall average. See our full ranking below. Yale performed extremely well in 2014— the portfolio returned 20.2% rising to $24 billion—but was overtaken by University of Texas System ($25.4 billion) for the ranking’s silver medal. Meanwhile, University of Pennsylvania bumped Columbia from the top ten.

In the endowment world, as in private banking, size matters. The largest endowments earned the highest returns, which – despite a few blips and exceptions – roughly decreases along with portfolio size. Endowments with more than $1 billion in assets, for instance, returned 16.5% while those under $25 million, earned 15.5%. The gap becomes more pronounced over time, with large university endowments earning 8.2% over 10 years, as the smallest earned just 6.6% over the same period.

The world of the superrich is getting more fluid and complicated by the day. The very wealthy increasingly have a second passport, far-flung homes, and assets to escape to, if the going gets rough at home. Wittingly or not, we have created an elite subset of globe-trotters who are residents of this city or that, but they may no longer be citizens, in the deepest sense, of one specific nation or the other.

That’s our conclusion from reading the latest in-depth wealth report. According to insurer National Financial Partners and Wealth-X, a research outfit, there are 211,275 ultra-high net-worth individuals on the globe, defined as those with assets of more than $30 million each. All told, these folks lord over $29.7 trillion. But the superrich are aging, and $16 trillion of that pile is expected to pass to their heirs over the next 30 years.

That means roughly the equivalent of the current U.S. economy is going to trade hands during this wealth transfer, producing a long list of private bank winners and losers across the globe. Wealth-X came to that $16 trillion wealth transfer figure by presuming wealth creation will follow its historical trend, with the ultra-high net-worth population growing annually by 4.6%, and the wealth they control, by 6.7% annually. Assuming that’s the case, the world’s billionaire population will, by 2020, grow by nearly 80% and increase by 1,700 individuals.

Family businesses are feeling confident about their financial outlooks but are increasingly unsure about their own succession plans. That’s the finding in an ironically-titled PwC report “Professionalize to optimize: U.S. Family firms are no longer winging it.” The key takeaways: Most families don’t have an appointed successor, parents are unsure if they even want their kids to take the reins, and they haven’t yet begun a dialogue expressing their reservations.

Every two years since 2007, PwC surveys more than 150 U.S.-based entrepreneurs, 65% of who run businesses with more than $100 million in revenue, on the state of their financial well-being. The good news is that economic uncertainty and sluggish growth are well behind these wealthy business owners. Families expecting “aggressive growth” over the next five years nudged up five points to 16% of those surveyed, pulling from the “no growth” camp since those reporting “steady growth” remained stable at about 80%. Meanwhile, concerns about market conditions have come down steadily, even while they fret over government policy related to Obama’s healthcare legislation and increasing taxes.

There’s yet more proof here that the economy is on solid ground, though, as these family businesses also report that they are vying for business with competitors more than ever. These firms reported increased competition among the top three concerns, up 36% versus 21% in 2012. A top worry feeding off the trend was staffing, with 60%, up from 46%, seeing recruitment as an ongoing problem.

“That’s what you’d expect to see as economic optimism grows. Businesses I talk to are increasingly building and expanding, so they are also reporting greater competition in markets for the same resources,” says Alfred Peguero, partner at PwC.

But buried in the back of the report were a few more revealing findings on family business succession plans.

Wondering how your family office stacks up against others around the world? The Global Family Office Report, put out by UBS and Campden Research, surveyed 205 family office beneficiaries and executives globally, collectively managing $180 billion in assets, looking at everything from investing to philanthropy. In other words, it serves as a great “how to” guide for family office best practices.

Most interesting is the study’s rigorous analysis of family offices and their operating costs. The mean annual operating cost of maintaining a family office is 86 basis points. But it varied significantly across the survey’s respondents, between 50 basis points and 230 basis points. The ratcheting figures are partially explained by a counter-intuitive phenomenon: at a certain point, operational costs increase along with the size of the family office.

On average, the survey finds that family offices below $500 million paid 86 basis points, meanwhile, those above that threshold paid 95 basis points. That’s because the largest family offices are more likely to pursue more aggressive and active growth strategies, over delicately balancing the portfolio and just fighting to preserve the honey pot. So, at that critical wealth point above half a billion dollars, the families redeploy their assets in very long horizon investments – such as private equity, real estate and direct venture capital. And that impacts costs. Investing for growth, not just wealth preservation, raises operating costs on average anywhere between 5 and 19 basis points.

The once small community of investors looking for returns in environmentally- and socially-sensitive companies just became a lot bigger. That’s according to the biennial study put out by the U.S. SIF Foundation, a nonprofit advocate for the socially-responsible investing industry. The U.S. SIF study claims that, in the past two years, “sustainable, responsible and impact investing” assets (SRI) in the U.S. have grown by 76% to $6.57 trillion.

Do-good dollars now represent 18% of the total $36.8 trillion in professionally-managed U.S. assets. It’s the clearest indication yet that the industry has reached a tipping point, as large publicly-traded companies, family offices, and traditional money managers join the ranks of converts. This bodes well for the blossoming industry, says U.S. SIF’s CEO Lisa Woll, who sees SRI assets growing to 25% of the U.S.’s total assets under management, in the next four years.

Consider just the changing nature of the organization’s own 300 members. “In the beginning, we had the early actors like Calvert Investments and Trillium Asset Management, but now firms like Bloomberg and Morgan Stanley have joined,” she says. Among the more recent converts are private-equity fund managers and large family offices; the next wave, Woll predicts, will be wealthy individual investors and their families.

How are the world’s wealthiest business owners investing their money? A survey conducted by Scorpio Partnership and BNP Paribas Wealth Management offers a glimpse. Among the key findings uncovered among the world’s increasingly younger millionaires and billionaires: These serial entrepreneurs are keeping a sizable portion of their wealth tied up in their businesses, betting that their own profitability far outstrips any investment in their home countries.

The Scorpio/BNP report surveyed 2,523 entrepreneurs spread across 17 different countries, with an average net worth of $7.6 million. The respondents were either majority owners in their own businesses, angel investors, or both. For these folks, entrepreneurship is in their blood, says Sebastian Dovey, founder of Scorpio Partnership. (See also Scorpio’s ranking of the world’s largest private banks). The report found that nearly 60% come from families who have run businesses. But there is a range based on geography: In countries like Taiwan, Spain and Poland, 80% of those surveyed came from families similarly bitten by the entrepreneurial bug.

Interestingly, in developed markets such as the U.K, U.S., Germany and France, that figure came in around 50%. There’s more to this low-looking figure than meets the eye. In emerging markets, which are still maturing, “having family backers is important. In the U.S. and Europe, however, “we’re seeing a growing number of first timers,” Dovey says. In other words: Self-starting entrepreneurs, without a family legacy in business, supporting their efforts in the background. Think Silicon Valley.

When it comes to investing in private companies, the superrich are increasingly taking matters into their own hands. They’re shunning private-equity funds and investing directly in private companies, drawing on their own entrepreneurial experiences and their network of similarly successful business owners.

A recent survey by McNally Capital, a Chicago-based advisor to family offices, found that 77% of ultra-wealthy families prefer direct deals over private equity funds, up from 59% in 2010. The survey covered 100 families, with a median net worth of $1 billion. The overwhelming reasons cited for investing directly in private companies was to “leverage my experience and knowledge” and “achieve outsized returns.”

Bob Casey, senior managing director of research at the Family Wealth Alliance, cites another reason. “Private equity funds and fund of funds are increasingly seen as overpriced, lacking transparency, liquidity, and control, among other shortcomings,” he says.

According to the study, 52% of the families plan to complete at least two private deals this year and they’re eyeing 20%-plus annual returns for these investments over the next five to 10 years.

What are the world’s billionaires investing in these days? UBS and Campden Wealth recently conducted a survey analyzing the portfolios of more than 100 billionaire family offices spread across Europe, Asia and the U.S. The study captured a few key differences: U.S. investors have a higher share of their wealth in equities and developed market fixed income. Asian investors keep 3% of their wealth in “wine, art and watches” and have a relatively small exposure to hedge funds and private equity. Europeans, meanwhile, hold 21% of their wealth in real estate, roughly the same as they have in stocks.

These regional differences aside, the research found that the super wealthy are loading their portfolios with between 45% and 62% in alternatives, while keeping 10% to 15% in cash (see table below). Simon Smiles is UBS Wealth Management’s chief investment officer for clients with at least 50 million Swiss francs ($55 million), who have some 447 billion Swiss francs in assets with UBS. He says his wealthiest clients are underweight equities and recommends greater exposure to the U.S. and Canadian stock markets in particular.

“Today, conversations about what is risky and what is less risky are radically different than in the past,” he says. They are, in fact, overweight cash, still wary of equities after weathering the 2008 collapse, and don’t like what the likelihood of rising interest rates will do to 10-plus year Treasury bonds. This is not an entirely new discovery. For more on these themes, see our March Penta cover story, “Treasure Hunt.”)

Hedge fund investors had better temper their expectations for 2014. In the past two years, hedge funds have posted double-digit returns, according to alternatives investment data provider Preqin. But this year, Preqin’s all hedge fund benchmark is up just 3.7% year-to-date, way short of the double-digit returns expected for 2014 by family office investors.

Trouble is not apparent on the surface of it. Three of the 27 strategies tracked by HFR, the hedge fund tracking firm, have beaten the S&P’s 5.6% return; six did better than the 4% of the Barclays U.S. Capital Government/Credit Bond index. None of that sounds too bad. But here’s another truth: One-quarter of the 16,500 funds tracked by Preqin are either flat or in the red in 2014.

Perhaps Preqin’s most important survey finding: More than half of fund managers and institutional invests now believe 2014 hedge fund returns will fall between 4% and 6%, net of fees, suggesting investors shouldn’t expect too much more from their hedge fund investments this year.

About Penta

Written with Barron’s wit and often contrarian perspective, Penta provides the affluent with advice on how to navigate the world of wealth management, how to make savvy acquisitions ranging from vintage watches to second homes, and how to smartly manage family dynamics.

Richard C. Morais, Penta’s editor, was Forbes magazine’s longest serving foreign correspondent, has won multiple Business Journalist Of The Year Awards, and is the author of two novels: The Hundred-Foot Journey and Buddhaland, Brooklyn. Robert Milburn is Penta’s reporter, both online and for the quarterly magazine. He reviews everything from family office regulations to obscure jazz recordings.